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Scary VIX Charts

A few VIX charts published in financial blogosphere yesterday do not impress me. VIX has stayed low for longer than usual. But VIX represents a specific measure of volatility. If a different measure is considered, there is nothing unique taking place.

Scary charts are in fashion nowadays and attract clicks. Charts do not impress me because one thing I have learnt is that for every chart there is another chart to challenge any inferences made from it. This is how the markets work.

A chart attributed to Citi Research has been published in several websites in the last few days. The chart shows the number of days VIX has stayed below 10 in a 6-month rolling window. A spike shows to levels much above normal since 1990.

This is an impressive chart. There is actually an unofficial contest in the financial blogosphere of who is going to produce the most impressive or scary chart. So data-mining has found another good application.

For every chart that is supposed to impress me I can usually find another chart to challenge it. In this case why not considering the annualized standard deviation of S&P 500 long returns in a period of 252 days instead of VIX and then counting how many times it has stayed below 10 in a 6-month rolling window? Below is the relevant chart.

Voila! The annualized 252-day volatility has stayed below 10 for extended periods of time, much longer than it has recently, in the 1960s, 1970s and 1990s.

According then to this volatility measure, there is nothing unusual about the current state of volatility. Similar periods of “quiet markets” have happened multiple times in the past and will happen again. These impressive charts in most cases offer no valuable information other than naive descriptive statistics.

Now, those who produced the VIX chart maybe should try to offer an explanation as to why the annualized volatility chart does not look as impressive.

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